North American Morning Briefing : UPDATED: Stocks to Drop as Recession Fears Grip Markets

06/30/2022 | 05:31am

MARKET WRAPS

Watch For:

Personal Income & Outlays for May; Weekly Jobless Claims; Chicago Business Barometer - ISM Chicago Business Survey - Chicago PMI for June; Canada GDP for June

Opening Call:

Stock futures dropped more than 1% on Thursday as the familiar fears of more interest rate increases and the risk of recession continued to weigh on investors.

Worries over the Federal Reserve's pathway to rein in multi-decade high inflation with aggressive interest rate hikes--and the risk of recession that brings--have dominated the market narrative in 2022.

"If everything remains unchanged today we're currently set to end [the first of the year] with the S&P 500 off to its worst first half since 1970 in total return terms," said Henry Allen, an analyst at Deutsche Bank.

"A large reason for that has been investors' fears that ongoing rate hikes to deal with inflation will end up leading to a recession," Allen said.

Overseas, the pan-European Stoxx 600 tumbled 1.7% and Tokyo's Nikkei 225 shed 1.5%.

"We are at the month and quarter-end. We are likely to see some chunky rebalancing flows from institutional investors across multiple asset classes," said Jeffrey Halley, an analyst at broker OANDA. "That may distort price movements and throw up a few false positives in markets today."

A catalyst in the day ahead could be the personal consumption expenditures price index. The data will be closely watched, considering PCE is the Fed's preferred inflation indicator.

Economic Insight:

Global consumer confidence in June reached levels only seen in economic recessions, according to JPMorgan's aggregate global indicator, which excludes China.

The magnitude of the current shock to consumer confidence is about 85% of the drop seen during the initial Covid-19 outbreak and about three-quarters of the shock during the 2008 global financial crisis, JPM said. The slide from last year's peak has been broad-based, although it has been larger in developed markets than in emerging markets, the data show.

The fall in confidence is largely due to concerns over inflation, though consumers are also likely responding to the sharp slide in equity markets and broader concerns about the outlook for the economy, JPM said.

---

Data from regional manufacturing surveys in the U.S. show that supply-chain shortages have improved in the last few months, said Capital Economics.

Less bottlenecks will likely contribute to ease core goods inflation over the second half of the year, with core producer price inflation set to fall to 5% over the coming months from 8.3% in May.

"The fact that supply chain pressures are already easing is an encouraging sign the Fed's inflation problem may soon look less daunting."

Forex:

The dollar edged down in Europe but the USD Index remained above 105.00 following the buck's solid gains on Wednesday.

Recession fears appear to have strengthened, said CMC Markets, after the final reading of U.S. GDP was revised lower while the GDP deflator climbed further, pointing to a sharp slowdown in economic growth.

Read: Sweden Becomes the Latest to Hike Interest Rates, with 50-Basis-Point Policy Move

Energy:

Oil prices edged higher in Europe ahead of an OPEC+ meeting at which member states will discuss production levels

Despite growing concerns about market tightness, the cartel's members and allied oil-producing nations are expected to stick to a plan outlined at a previous meeting to raise oil supply by just under 650,000 barrels a day in August.

Regardless of what production levels the group agrees to, the oil market is concerned that the group is falling behind its quotas due to a lack of spare capacity.

"The headache for the oil market is the inability of OPEC+ to deliver the promised volumes," said DNB Markets.

Metals:

Gold futures were flat in early trading despite other recession hedges falling having acted as headwinds for the precious metal this year.

"Gold is still underperforming, catching a down draft from the deflated commodity super cycle thanks to front-loaded Fed hikes," said SPI Asset Management.

---

Base metal prices were lower in London, with a lack of Asian buying outweighing the positive sentiment from China's decent PMI data.

"Whilst we had a very decent China PMI print showing a V-shaped recovery from April lows, metals in general barely reacted to this," said Marex's Asian team. "Asia has not been a buyer of metals in general," keeping prices lower.


TODAY'S TOP HEADLINES


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Macmillan "recently experienced a security incident, which involves the encryption of certain files on our network," the publisher said Wednesday. "As a precautionary measure, we immediately took systems offline to prevent further impact to our network."


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U.S. Agrees to Pay $3.2 Billion for More Pfizer Covid Vaccines

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06-30-22 0530ET

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